On December 17th, the State Council officially released the "Regulations on the Supervision and Administration of Non-Bank Payment Institutions" (hereinafter referred to as the "Regulations"), which will come into effect on May 1, 2024. In January 2021, the People's Bank of China (hereinafter referred to as "the Central Bank") had issued the "Regulations on Non-Bank Payment Institutions (Draft for Comments)" (hereinafter referred to as the "Draft for Comments").

The Regulations consist of six chapters and sixty articles, covering content such as entry thresholds, business rules, user rights protection, and penalty methods.

Among them, based on the ability to accept prepaid funds from payers, the Regulations reclassify payment services into two categories: stored-value account operation and payment transaction processing. The heads of the Ministry of Justice and the Central Bank stated that this move will help prevent regulatory gaps and avoid regulatory arbitrage. In addition, the deletion of some anti-monopoly content in the Draft for Comments has also attracted market attention.

Data shows that currently, non-bank payment institutions handle over 100 trillion transactions and nearly 400 trillion yuan in amount, accounting for about 80% and 10% of the total volume of electronic payment services in the country, respectively.

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The heads of the Ministry of Justice and the Central Bank stated that non-bank payment services have played an important role in small and convenient payment areas, while some payment institutions have also been operating in violation of regulations from time to time. Against this backdrop, the relevant departments have introduced the Regulations, elevating the effective systems from regulatory practice to administrative regulations, further solidifying the legal foundation for the standardized and healthy development of payment institutions.

The China Payment and Clearing Association believes that the Regulations, as the "basic law" for the healthy and sustainable development of non-bank payment services, mainly have three key meanings: first, it clarifies the position of payment institutions in the payment system from a legal perspective, that is, small and convenient; second, it encourages payment institutions to cooperate with banks to provide payment services to corporate clients; third, it has stricter provisions for user rights protection, focusing on preventing and resolving payment risks.

"The introduction of the Regulations further perfects the top-level design of payment field supervision, elevates the legal level of payment institution supervision, and more comprehensively and systematically stipulates the management and handling of major issues in the payment field, which is conducive to continuously promoting the high-quality development of payment and clearing services," said the China Payment and Clearing Association.

Regarding the impact of the Regulations on the industry and institutions, many analysts have indicated that many provisions still await the release of specific implementation details, and the subsequent impact still needs further assessment.

The Central Bank stated that the next step will be to formulate the implementation details of the Regulations, to expedite the improvement of related supporting documents, and the specific classification method of payment services, the transition provisions between old and new types of business, etc., will be further refined and clarified in the future.Adjusting Anti-Monopoly Content

Compared to the draft for comments issued at the beginning of 2021, the "Regulations" have undergone numerous changes.

In the view of Dong Ximiao, Chief Researcher at China United, the most significant change is that all the provisions related to anti-monopoly or unfair competition have been removed, leaving only the principle requirement of Article 42.

Article 42 stipulates, "Non-bank payment institutions shall not engage in monopolistic or unfair competitive practices that hinder the fair competition order of the market. If the People's Bank of China, in the performance of its duties, finds that a non-bank payment institution is suspected of monopolistic or unfair competitive practices, it shall refer the relevant clues to the relevant law enforcement departments and cooperate with them in the investigation and handling."

In the previous draft for comments, more detailed provisions had been made regarding early warning measures for market dominance by payment institutions, the determination of market dominance situations, and regulatory measures for market dominance.

For instance, when a non-bank payment institution's market share in the non-bank payment services market reaches one-third, or when the combined market share of two non-bank payment institutions reaches one-half, it may touch the "early warning line" of regulatory authorities.

At that time, whether the two recognized major payment institutions—WeChat Pay and Alipay—would constitute a monopoly became a focal point of concern. The industry insiders had a heated discussion around the determination criteria of the draft for comments.

Regarding the adjustment of the "Regulations," Wang Pengbo, a senior analyst in the financial industry at Broadcom Consulting, believes that "in conjunction with the previous policy recognition of the platform economy and the completion of rectification by relevant industry giants, it meets the external policy expectations."

"The next step is to focus on promoting the interconnectivity in the payment field," Dong Ximiao believes that true interconnectivity is when all payment institutions and tools, especially large platforms, open their payment interfaces, truly facing all payment institutions and tools, and strictly prohibit exclusive and discriminatory payment agreements. In this sense, there is still a long way to go for the interconnectivity in the payment field, with a heavy responsibility and a long journey ahead.

Another adjustment that has attracted attention is the requirements for the main shareholders and actual controllers of payment institutions.Wang Pengbo stated that compared to the draft for comments, the "Regulations" significantly reduced the requirements for the controlling shareholders and actual controllers of non-bank payment institutions. For instance, the content that "major shareholders and controlling shareholders should be limited liability companies or joint-stock companies with good governance structures, clear equity structures and organizational frameworks, and transparent structures of shareholders and ultimate beneficiaries" has been removed.

"The reasons for the changes, apart from considering the feasibility of penalties to avoid overlapping penalties with other regulatory bodies, may also have taken into account the opinions of payment institutions. It is likely that they have considered the definitions of different types of shareholders across various financial institutions to have certain differences, and they hope that equity transfers and the like will better conform to the natural laws of market operations. After all, the payment industry has already become a stable industry within the industrial chain," Wang Pengbo said.

Reclassification to Eliminate Regulatory Gaps

One of the highlights of the officially released "Regulations" is the reclassification of payment services.

Since 2010, the "Administrative Measures for Payment Services of Non-Financial Institutions" have categorized payment services into three types: online payment, bank card acquiring, and prepaid card services, based on transaction channels and acceptance terminals. However, with technological innovation and business development, new payment methods such as QR code payment and facial recognition payment have emerged, and the existing classification method can no longer adequately meet market development and regulatory needs.

Therefore, based on the ability to accept prepayments from payers, the "Regulations" reclassify payment services into two categories: stored-value account operation and payment transaction processing.

According to Article 15 of the "Regulations," "Non-bank payment services are divided into two types based on whether they can accept prepayments from payers: stored-value account operation and payment transaction processing. However, single-purpose prepaid card services do not fall under the payment services defined by these regulations. The specific classification methods and supervisory management rules for stored-value account operation and payment transaction processing services shall be formulated by the People's Bank of China."

The heads of the Ministry of Justice and the central bank stated in response to reporters' questions that this adjustment, which combines years of regulatory practice and draws on the experience of payment service classification in other countries and regions, adheres to the concept of functional regulation.

The aforementioned heads indicated that the new classification method has two main features:

First, it has good scalability, which is conducive to preventing regulatory gaps. Under the new classification method, regardless of the external form of payment services, they can be classified and managed according to the essence of the business, which can better adapt to industry development changes and categorize various new payment channels and methods into the two basic types of services.Secondly, it avoids regulatory arbitrage, which is conducive to promoting fair competition. The new classification method is based on the essence of the business and risk characteristics, penetrating the surface form of payment services, which is beneficial for unifying the admission conditions and business rules requirements for capital, etc., eliminating regulatory lowlands, and forming a fair institutional environment.

Regarding the transition from the old to the new classification method, the central bank will soon study and formulate detailed implementation rules, do a good job in connecting the new business types with the original classification method, and promote a smooth transition.

"Previously, payment institutions, especially online payment institutions, were more concerned about whether the payment accounts were limited to natural persons (including individual industrial and commercial households), which is not explicitly stated in this regulation," said Wang Pengbo. However, the regulation encourages payment institutions to cooperate with banks to provide payment services for corporate clients, leaving room for payment institutions to carry out corporate account services.

"The content about cross-border payment is also very important," Wang Pengbo added, "Article 2 of the regulation reaffirms that cross-border payment practitioners must hold a domestic payment license. In the current typical cooperation model of cross-border payment, payment institutions without a domestic license abroad, although only providing pure foreign payment and settlement services, it is still necessary to clarify who controls the core merchant information. The new rules may subvert the existing 'assisted support' model."